Form 8938

[Min Zhao]

I have a residual medical critical life insurance account from China. Is that considered a financial account or foreign financial asset account on Form 8938?

[marctu]

A residual medical critical life insurance account is a type of insurance policy that pays a lump sum benefit to the policyholder if they are diagnosed with a serious illness covered by the policy. The benefit can be used to cover medical expenses, household bills, and other costs.   Although I am not sure of the cost or the coverage of these types of policies in China, in the US the coverage is generally in under $50K, and the cost per month varies by age.  

So Form 8938, which is a Statement of Specified Foreign Financial Assets is required when a U.S. taxpayers is holding specified foreign financial assets with an aggregate value exceeding $50,000.

The following comes form the Instructions for Form 8938:

A specified individual is:

• A U.S. citizen
• A resident alien of the United States for any part of the tax year (see Publication 519 for more information)
• A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return 
• A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Publication 570 for definition of a bona fide resident).

A specified foreign financial asset is:

• Any financial account maintained by a foreign financial institution, except as indicated above 
• Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:
  • Stock or securities issued by someone other than a U.S. person
  • Any interest in a foreign entity, and 
  • Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

Foreign life insurance policies can hold foreign assets, investments, accounts, and income. The income generated from these policies is taxable in the United States, and the value of the policy must be reported to the IRS if in aggregate the value is $50,000 or more.

I would err towards reporting it if the value of the policy is $50,000 or over, though these policies in the US are generally under $50,000.  

Thank you for the opportunity to answer your questions @Min Zhao 

All the best,

Marc T.

TurboTax Live Tax Expert

[KanchanM]

As per IRS, if you are required to file Form 8938, you must report your financial accounts maintained by a foreign financial institution. Examples of financial accounts include:

• Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.

And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterpart that is not a U.S. person. Examples of these assets that must be reported if not held in an account include:

• Stock or securities issued by a foreign corporation;
• A note, bond or debenture issued by a foreign person;
• An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterpart;
• An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterpart or issuer;
• A partnership interest in a foreign partnership;
• An interest in a foreign retirement plan or deferred compensation plan;
• An interest in a foreign estate;
• Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value. 

The examples listed above do not comprise an exclusive list of assets required to be reported.

Based on above,  any foreign issued insurance contract or annuity with a cash-surrender value is reportable. Also, the above list not exhaustive, so you should include residual medical critical life insurance account from China in your Form 8938.

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[pk]

@Min Zhao  whereas I agree with the comments from my colleagues @marctu  and @KanchanM ,  the focus here has only addressed the 8938  reporting requirements i.e. these would come under  FATCA regulations  ( as  trusts/ entities).  However, because these are un-regulated insurance companies  (  may be  regulated under Foreign/ local  tax laws), they would generally be  classed as PFICs ( Foreign Passive Investment Companies).  If this is true then there may be  also mark-to-market  recognition requirements -- of any residual value.    This is just for awareness at this stage but may indeed become a tax event.